Choosing a Financial Advisor? Read This First to Avoid Making a Mistake

• Author: Kelly Cooke
• Posted: 2024-06-27

Choosing a financial advisor is one of the most significant decisions that you will make for your future. Working with a professional will make you feel more confident in the decisions that you make regarding your financial future. For those individuals not well-versed in the financial and investment sector, it can be overwhelming to choose this advisor. Here are a few of the most common mistakes that people make when looking to choose this financial professional.

Hiring the First Advisor

It may be tempting to hire the first adviser that you interview. This is especially true if you hit it off with them right away. It is more prudent to take the time to interview a few different candidates. You will feel more confident in your decision if you have put in your due diligence.

Not Asking for Credentials

All of the personality in the world cannot make up for a deficit in knowledge and credentials. In order to officially offer investment advice, a financial advisor must pass a certified test. There are a number of different licenses and credentials that your advisor may possess. Examples include Series 66, Series 65, and Series 7. You can even find an advisor who has become a Certified Financial Planner. Understanding what you want in an advisor and finding one who meets these qualifications will go a long way in ensuring that you find the best fit for your needs. Because the title of a financial advisor can mean a lot of things, it is recommended that you truly understand where your candidates fall on the spectrum before making a decision.

Selecting an Advisor with the Wrong Specialty

Choosing an advisor is not a one-size-fits-all approach. Many people make the mistake of selecting an advisor not suited to their specific needs and preferences. For example, older families will likely need to choose an advisor who specializes in retirement planning. Conversely, younger families should look for a professional who has a strong background in building a portfolio from the ground up with a focus on the long term. If you are a small business owner, it is important to choose an advisor equipped to handle these specific tax challenges.

Not Understanding the Pay Structure

There are a variety of ways in which an advisor may take payment for their services. It is up to you to fully understand how your advisor is paid. Many advisors go with a fee-only scale, charging a flat rate for their services. Other advisors may choose to charge a percentage of the assets that they manage for you. Only you can decide what is comfortable for you.

Choosing an Advisor with an Incompatible Investing Approach

How you manage your money is a highly personal decision. While it is always a good idea to be open to hearing different opinions and strategies when it comes to investing, it is also vital that you choose an advisor who is compatible with your approach. If you are more conservative with your finances, there is a good chance that you will clash with an advisor who tends to be more aggressive. In addition, if you are high on stocks and your advisor leans towards bonds or other conservative strategies, you will likely not be happy with their advice.

Not Knowing the Difference Between the Fiduciary and Suitability Standards

Lastly, it is important to understand the difference between the fiduciary standard and the suitability standard. An advisor who falls under the fiduciary standard is bound by ethical duty to recommend the best investment strategy for you personally. On the other hand, those under the suitability standard are only required to recommend and sell investments that are suitable for clients in general, not necessarily your personal needs. In most cases, insurance agents and general brokers will fall under the suitability standard. You will want to ask your advisor if they are bound to act as a fiduciary at all times.

When looking to hire a financial advisor, be sure to keep in mind that not any professional will do. Being aware of the most common mistakes will help you to make a better selection. Your financial future hinges in large part on this decision.